Operating Losses Of State Discoms To Stay High Despite 15-20% Dip

Crisil Ratings Operating losses, denoted by the gap between the average cost of supply (ACS) and average revenue realised (ARR) per unit of power, of 30 state power distribution companies (discoms) will remain sizeable at 40 to 45 paise per unit this fiscal despite a 15 to 20 per cent reduction on-year. 

Elevated cost of supply and subdued tariff hikes have kept operating losses elevated and led to an increase in borrowings to fund the losses. That, in turn, will keep credit profiles weak and discoms reliant on timely government support.

“Though efforts have been made to reduce the ACS-ARR gap, the tariff hike trajectory has historically been slow to adjust to increasing costs. For instance, while ACS rose more than 90 paise during the past two fiscals due to a sharp increase in power cost2 amid high demand, ARR increased by only 60 to 70 paise," said Ankit Hakhu, Director, Crisil Ratings.

There are multiple reasons for the slow growth in ARR. First, even at the national level, despite improvement, there have been delays in the release of tariff orders. For instance, discoms in 10 of the 36 states and union territories (UTs) witnessed delayed or no release of tariff orders for fiscal 2024 (14 states and UTs for fiscal 2023 and 22 for fiscal 2022), Crisil noted.

Second, regulatory support mechanisms such as automatic pass-through have been implemented in only 15 states and UTs. Third, the improvement in billing efficiency has been slow and it remains below 90%, impacting the revenue of discoms and keeping the ACS-ARR gap at 40-45 paise per unit this fiscal. 

That said, it will be only the second instance of the gap narrowing below 50 paise per unit in the past five fiscals.

“The narrowing of the ACS-ARR gap will be primarily due to an expected moderation in ACS from its peak last fiscal, led by a reduction in power cost as domestic power supply improves and cost of generation reduces. It is also supported by slow but steady improvement in ARR and reduction in aggregate technical and commercial (AT&C) losses in the units getting supplied and billed, thereby supporting improvement in revenue for discoms," said Ankush Tyagi, Associate Director, Crisil Ratings.

While the operating losses are expected to slip from more than Rs 30,000 crore in the past two fiscals to Rs 25,000-30,000 crore this fiscal, they will remain large, leading to increased debt in balance sheets to fund the losses and keeping the credit profiles weak.

That makes a continued improvement in subsidy realisation from state governments crucial for the discoms. While subsidy disbursements from states have been more than 100% and timely over the past three years, any dilution in state support or delay in subsidy realisations will pose downside risks to the estimates of operating losses.